We are maintaining our Neutral recommendation on
Waste Management Inc.
) based on concerns regarding lower commodity prices, electricity
prices and a challenging pricing scenario. Waste Management
currently maintains a Zacks #4 Rank (Sell) for the short term.
Waste Management's second quarter 2012 EPS increased 4% to 52
cents while revenues increased 3% to $3.4 billion. However, both
fell short of Zacks Consensus Estimates.
For fiscal 2012, Waste Management expects 2012 adjusted EPS
between $2.15 and $2.22. Free cash flow is projected between $1.1
billion and $1.2 billion.
Volumes finally improved for a second consecutive quarter. The
last time Waste Management delivered two straight quarters of
volume growth was back in 2005. Volume had been on the decline due
to the weak economic environment, pricing, competition and the
increased focus on waste reduction and diversion by consumers.
Industrial, special waste and recycling operations saw positive
volume growth. Residential volumes are still lingering in negative
territory, but have improved over the last six quarters. Based on
the improving trend, we assume slightly positive volume growth for
Waste Management's acquisition of Oakleaf Global Holdings will
provide North American customers with unprecedented access to waste
and recycling solutions by combining the largest network of
directly owned hauling, recycling, diversion and disposal assets
with the largest managed third-party network. Post integration, the
acquisition is expected to generate a minimum of $80 million in
EBITDA on an annualized basis.
Waste Management recently announced certain restructuring
actions, which include doing away with certain management
positions, consolidating some back-office functions, consolidating
its 22 areas down to 17, reducing corporate support staff and
bringing the overall headcount down by about 700. Cost savings are
expected to enhance margins by about 100 basis points in 2013, and
the company targets an expansion of 200-300 basis points by
On the flipside, average commodity prices have declined since
the fourth quarter of 2011 which has impacted the company's
earnings. For the first half of fiscal 2012, the decline in average
commodity prices dragged down earnings by 6 cents. Waste Management
is expected to face commodity price headwinds for the remainder of
fiscal 2012, which will likely have a negative year-over-year
impact of approximately 5 cents on earnings per share.
During 2011, approximately 54% of the electricity revenue at
Waste Management's waste-to-energy facilities was subject to
current market rates. The company estimates that nearly 56% of its
electricity revenue at its waste-to-energy facilities will be
realized at market rates by the end of 2012. The company's exposure
to market price volatility or electricity has increased over the
last few years as long-term power purchase agreements have expired.
Electricity prices were 8% lower in the first quarter and down 10%
in the second quarter on a year-over-year basis. Electricity prices
are expected to be at low levels in the second half of 2012 as
well, with a negative impact of 2 cents per share on earnings.
Waste Management's margins have been affected mainly due to the
integration of Oakleaf and higher materials costs. Based on
stabilizing volumes, the company plans to be more aggressive on
pricing in the back half of the year. Overall, the pricing
environment remains challenging and highly competitive due to
aggressive bidding by smaller competitors. We do not expect any
margin improvements until at least 2013.
Waste Management is the largest provider of comprehensive waste
management services in North America. The company provides
collection, transfer, recycling and resource recovery, as well as
disposal services, to nearly 20 million residential, commercial,
industrial and municipal customers. It competes with
Republic Services, Inc.
Casella Waste Systems Inc.
CASELLA WASTE (CWST): Free Stock Analysis
REPUBLIC SVCS (RSG): Free Stock Analysis Report
WASTE MGMT-NEW (WM): Free Stock Analysis Report
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